06 February 2013

Don't kill older workers to make jobs!

Many people believe the "lump of labor" fallacy, i.e., there's a fixed number of jobs to go around and that either (1) some people need to quit for others to get a job (see image) or (2) people can share the fixed number of jobs (France's 35 hour workweek).

The economic fact is that there are as many jobs out there as there are productive workers. A worker who can create $10 of value will get a job that pays less than $10. A worker who can create $2 in value will get a job when the cost of employment is less than $2. Employers, in other words, hire workers to INCREASE PROFITS.

Caveats:
  • Government regulations and labor market frictions often create a large gap between the cost of employment and the wages that go to the worker. Large gaps mean that workers who can produce, say, $40 in value per hour are not hired at $25 per hour.
  • Many people are paid "too much" for what they produce because they have job security, have difficult-to-measure productivity, or because they con the Board of Directors into paying them crazy wages. 
  • Some workers (e.g., financial traders) are paid to destroy social value. 
  • Others get paid for their lobbying instead of production because they convince politicians or bureaucrats to give them Other People's Money.
Bottom Line: You can get a job if you can convince someone that you create value. (Work for free for a few weeks and show them if they don't believe you.) If you're value is too hard to fit into the corporate box, then start your own business.

6 comments:

  1. But productivity and value creation is not unlimited, because resources are limited. So the number of jobs is indeed somehow limited.

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  2. @Joan -- labor can substitute for resources, so your premise is wrong in that way (and several others).

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  3. I´m not an economist, so maybe I shouldn´t waste your time, but you mean that there are certain professions that do not need or hardly any resources? Ok, I can get that. But isn´t there also a limit to this? For the economy of a small village without any trade or whatsoever, it is not feasible to have only 1 farmer and the rest of the people priests?

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  4. @Joan -- you're getting into questions on the "scale of the market" and the importance of trading. If every PERSON needs to be self sufficient, then resources, etc. will determine the difference between pleasure and death. Trade helps us extract benefits from resources.

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  5. You really should note basic short-run macroeconomic exceptions. After all, Says law was more-or-less proven fall a century ago.

    And while trade is generally beneficial to the size of the economic pie, we don't do economics any favors by perpetuating obviously false claims that it always benefits everyone. After all, that's why we have trade restrictions.

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  6. @anon -- your comments need far more caveats, as they are more wrong than right.

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